### Assignment Instructions/ Description

Phase V Tasks Accounting for the Lifetime Value of the Customer As before, suppose the firm only offers the subscription plan consisting of NBC, CBS and ESPN on LG devices. Suppose also that it prices this plan at the rate you computed in Question 3 of Phase VI. Using other existing field data on consumers who have already adopted the service, you know that an existing customer has a 70% chance of defecting in any given month when you charge the price computed in Question 3 of Phase VI. Assume that you have 150,000 existing customers and that your total potential customers amount to 500,000, including the current existing customer base. From accounting, you also know that the cost of providing service to a customer is $8 per month. Moreover, the cost of contacting a prospective customer with an offer to sign up for the service is roughly $5. This "initial marketing contact" cost does not apply to existing customers. Finally, the firm's monthly borrowing cost of capital used to discount future revenues from a customer is 5% (i.e., the monthly discount factor is 1/(1+0.05)). 1) (6 points) What fraction (in percentage) of the prospective consumer market would you predict will adopt the service at this price? This fraction constitutes the probability that a randomly selected prospective customer adopts the service at the given price level. Round your answer to the nearest tenth. 2) (12 points) Build an LTV model and calculate the net present value of a prospective and an existing customer, respectively. Assume that an existing customer may terminate the subscription only at the beginning of the month and that a prospective customer may start the subscription only at the beginning of the month. Assume that all prospective customers are contacted once in the middle of the month. Round your answers to the nearest cent. Show your work. 3) (15 points) Recently, HBO has contacted your firm to negotiate a contract that would add HBO as part of the monthly subscription plan. The proposed contract would bill your firm an upfront one-time fixed payment of $50 million irrespective of the number of subscribers and a monthly payment of $2 per subscriber. Suppose you would continue to charge the price calculated in Question 3 of Phase VI even after adding HBO to the subscription. Would adding HBO to the subscription package be profitable in the long term? Show your work.�